Finally ERM Made Easy: ERM for Dummies Has Evolved!

Transcription

1 CONFERENCE PRESENTS Finally ERM Made Easy: ERM for Dummies Has Evolved! Presented by; Joanna Makomaski, P. Eng., CRM Dr. James Kallman, ARM

2 Agenda Tuesday, September 23, :30am to 10:00am Finally ERM Made Easy: ERM for Dummies Has Evolved! Introduction Part I : The ERM Evolution Dr. James Kallman (25 min) Part II: ERM for Dummies Has Evolved Questions Joanna Makomaski (45 min)

3 KCS Designs and delivers RIMS risk management training courses Develops and implements full scale ERM programs Unique knowledge, tools, and techniques Worked with utilities, health care, & financial services Publisher of the Journal of Risk Education

4 Consider the following ideas: Where have we been in risk management What s happening now Why it s important Why now? Had ERM been here What is the future of ERM? What is needed

5 Risk Management Evolution Insurance management Risk management Safety management Financial risk management Enterprise risk management

6 What s happening now? Insurance portfolio management COSO compliance Integrated financial management Enterprise risk management

7 Why it s important why now? External obligations Disclosure requirements International pressure Competitive advantage Profit optimization External Forces Corporate scandals Sarbanes Oxley - SOX Basel II accord Investor expectations Rating companies Internal Forces Managing cash flows Stakeholder accountability Meeting objectives Regulatory compliance

8 Had ERM been here Enron Tyco International Adelphia Peregrine Systems WorldCom

9 What is the future of ERM? Current and future levels of fraud Brian Duperreault s Call to the table S&P requirements International standards and compliance issues Competitive advantages

10 What still needs to happen? Definition, Consistency Real Tools and Methodologies True understanding of stakeholder expectations Compelling industry driver Compelling value: Ability to deliver a return on investment and meet the expectations of stakeholders. What companies are ripe for ERM (S&P)?

11 ERM Common Hurdles No common language and understanding Cultural shift Are we all talking about the same thing? Demonstrating the benefits & value Understanding of risk management s role Establishing success criteria and tolerances ERM longevity What is wrong with what we always did? Is is worth it? Why? What do I get out of it? Who should be doing this? Are we there yet? Are we OK? How do we keep this going?

12 Questions Dr. James Kallman, ARM 700 Furlong Drive Austin,Texas U.S.A Tel

13 CONFERENCE PRESENTS Finally ERM Made Easy: ERM for Dummies Has Evolved! Presented by: Joanna Makomaski, P. Eng., CRM V3 Advisory Group

14 ERM Expectations Framework Agenda Finally ERM Made Easy: ERM for Dummies Has Evolved! ERM Characteristics Upside vs Downside Risk What is Risk? What is ERM? Risk Adjusted Decisions Earnings Variability Management ERM Deliverables ERM Quick Tips

15 V3 Advisory Group V3 Advisory Group variability vision value Consortium of ERM experts and experienced risk professionals Proven value driven ERM methodologies Innovative ERM QuickStart program Step-by-step modular approach ERM implementation mapping and program planning

16 Expectations of ERM Objective decision-making process aligned with strategy Assist in defending expenditures Minimize operational surprises Understanding existing risk profile Improve underwriting information and decisions Compliance with fiduciary duty to shareholders Increase organizational efficiency Sleep well at night

17 ERM Framework Step 1 Programming What are our objectives? Targets? Step 2 Risk Analysis How variable are our objectives ±? Step 3 Solution Assessment What can we do about the variability? Step 4 Decision Process Which solution is best for us? Yes No Step 5 System Administration Has What anything can Ichanged do aboutwith this time? variability?

18 Governance Stock Price BOARD Process CEO Analytics Debt Costs Employee Recruitment Insurance Costs Technology performance Production Costs Sales

19 ERM Program Characteristics Focuses on impacts to organization s objectives (financial & strategic) Exploits natural hedges & portfolio effect (horizontal) Recognizes upside, as well as, downside risks (positive mental attitude) Coordinates all risk management strategies (vertical) Includes risks from all sources (financial, operational, strategic) Treated as a continuing loop or process Risk Officer is a team facilitator (funnel)

20 Downside RISK vs Upside RISK Common issue for grocery store: Incorrect change 50% of time more change to customer! 50% of time less change to customer

21 What is Risk anyway? A. likelihood x impact of an event? B. chance of a loss or gain? C. uncertainty? D. an adverse event? E. variation from what is expected?

22 Risk Variation from the expected outcome over time Time Probability (X) E(X) 3 E(X) 2 E(X) 1 Expected values

23 What is ERM? Enterprise Risk Management A decision-making discipline that addresses variation in company objectives.

24 Risk Adjusted Decisions Inches # % Inches # % 4'-8" % 0 4'-8" % 0 4'-9" % 0 4'-9" % 0 4'-10" % 0 4'-10" % 0 4'-11" % 1 4'-11" % 1 5'-0" % 2 5'-0" % 2 5'-1" % 2 5'-1" % 2 5'-2" % 2 5'-2" % 2 5'-3" % 3 5'-3" % 3 5'-4" % 5 5'-4" % 5 5'-5" % 6 5'-5" % 6 5'-6" % 8 5'-6" % 8 5'-7" % 8 5'-7" % 8 5'-8" % 7 5'-8" % 7 5'-9" % 7 5'-9" % 7 5'-10" % 5 5'-10" % 5 5'-11" % 4 5'-11" % 4 6'-0" % 3 6'-0" % 3 6'-1" % 2 6'-1" % 2 6'-2" % 1 6'-2" % 1 6'-3" % 1 6'-3" % 1 6'-4" % 0 6'-4" % 0 6'-5" % 1 6'-5" % 1 6'-6" % 0 6'-6" % 0 6'-7" % 0 6'-7" % 0 6'-8" % 0 6'-8" % 0 77 Mean: Mean: 67 14% 12% 10% 8% 6% 4% 2% 0% 4'-8" 4'-9" 4'-10" 4'-11" 5'-0" 5'-1" 5'-2" 5'-3" 5'-4" 5'-5" 5'-6" 67 5'-7" 5'-8" 5'-9" 5'-10" 5'-11" 6'-0" 6'-1" 6'-2" 6'-3" 6'-4" 6'-5" 6'-6" 6'-7" 6'-8"

25 Risk Adjusted Decisions Inches # % Inches # % 4'-8" % 0 4'-8" % 0 4'-9" % 0 4'-9" % 0 4'-10" % 0 4'-10" % 0 4'-11" % 1 4'-11" % 1 5'-0" % 2 5'-0" % 2 5'-1" % 2 5'-1" % 2 5'-2" % 2 5'-2" % 2 5'-3" % 3 5'-3" % 3 5'-4" % 5 5'-4" % 5 5'-5" % 6 5'-5" % 6 5'-6" % 8 5'-6" % 8 5'-7" % 8 5'-7" % 8 5'-8" % 7 5'-8" % 7 5'-9" % 7 5'-9" % 7 5'-10" % 5 5'-10" % 5 5'-11" % 4 5'-11" % 4 6'-0" % 3 6'-0" % 3 6'-1" % 2 6'-1" % 2 6'-2" % 1 6'-2" % 1 6'-3" % 1 6'-3" % 1 6'-4" % 0 6'-4" % 0 6'-5" % 1 6'-5" % 1 6'-6" % 0 6'-6" % 0 6'-7" % 0 6'-7" % 0 6'-8" % 0 6'-8" % 0 77 Mean: Mean: 67 14% 12% 10% 8% 6% 4% 2% 0% 4'-8" 4'-9" 4'-10" 4'-11" 5'-0" 5'-1" 5'-2" 64 5'-3" Earnings ($MM) Variability 5'-4" 5'-5" 5'-6" 5'-7" 5'-8" 5'-9" 5'-10" 5'-11" 6'-0" 6'-1" 6'-2" 6'-3" 6'-4" 6'-5" 6'-6" 6'-7" 6'-8"

26 What does a Monte Carlo Simulation do exactly? Portfolio Theory Missed Perfect Overshot NI Shortfall ($) Net Income ($) NI Surplus ($) Business Unit A 25 X X 95 X 20 Business Unit B 15 X X 75 X 30 Business Unit C 1. Supply Issues 2. Labour Concerns 3. Fewer Cust Adds 4. Warm weather 5. Etc 10 X X 90 X Colder weather 0% 2. Added load 3. Less gas loss 4. Etc..

27 What does a Monte Carlo Simulation do exactly? Portfolio Theory NI Shortfall Missed ($) Net Income ($) NI Surplus Perfect Overshot ($) Eg. Eg. 75% 75% chance chanceof ofreaching $77m $77mor orless Simulated outcome X 77 Business Unit A,B,C Combined Variability 12 X X 15 Address identified events that most contribute to unwanted variability

28 Regression Analysis Portfolio Theory NI Shortfall ($) Net Income ($) NI Overshot Surplus ($) X 77 Simulated outcome Business Unit A,B,C Supply Issues Labour Concerns Fewer Cust Adds Warm weather Etc 12 X Address events that most contribute to unwanted variability Take action on areas with greatest: Variability Sensitivity Impact X 15 0 % Colder weather Added load Less gas loss Etc.. Regression Analysis Inadequate Training Supplier disputes Facility Damage New load Marketing Colder weather Beta Coefficients

29 Earnings Variability Management Revenues Gas Sales Gas Costs Other Expenses O&M Depreciation Municipal & Cap Taxes Interest 3,000 (2,200) What causes the variance? Unplanned ± fluctuations in weather & consumption behavior Unplanned ± fluctuations in gas prices, & storage management Unplanned ± fluctuations in collections & initiatives Unplanned ± fluctuations in costs due to: overall cost or project management asset based incidents liability incidents HR incidents Eg. Eg. 75% 75% chance chanceof ofreaching $77m $77mor orless?? Earnings (Before Taxes) 100 Regression Analysis Inadequate Training Supplier disputes Facility Damage Colder weather New load Marketing? Beta Coefficients

30 What does ERM deliver? Business Intelligence Awareness Governance Strategy Execution Strong Alignment Consistency Efficiency Predictability Profit Provides powerful information that drives timely action for competitive advantage Improves risk conscientiousness and risk understanding Satisfies heightened compliance requirements for risk identification and reporting Supports effective strategic and operational planning Helps to align all company core functions and objectives Drives a structured & objective approach to risk management throughout the company Supports decisions for the efficient allocation of scarce resources Produces earnings more reliably Enhances our ability to optimize earnings

31 ERM Quick Tips LANGUAGE Create a corporate lexicon Use lexicon in all communications Framework can set language Avoid the word RISK Use existing communication tools Keep it simple LEVERAGE RESOURCES Assess ERM maturity Leverage what works Address areas systematically VALUE Make it useful; pain vs gain Measure what needs measuring Tie to decision process DECISION MAKING Know your business Understand all company values Model past decisions Test tolerances and weights EFFECTIVE PROCESS Collect only the information you need Make it fast & easy; use IT to help Avoid bureaucratic protocol Try it yourself Walk your talk

32 Questions Joanna Makomaski, P.Eng., CRM V3 Advisory Group Toronto, ON Tel

33 THANK YOU FOR ATTENDING THE CONFERENCE ENJOY THE REST OF YOUR CONFERENCE!